Net Stable Funding Ratio Guidelines 2024

REGISTRAR OF FINANCIAL INSTITUTIONS

NET STABLE FUNDING RATIO GUIDELINES BANK SUPERVISION DEPARTMENT DECEMBER 2024

Table of Contents Part I – Preliminary ..................................................................................................................................... 3

1. Introduction......................................................................................................................................... 3
2. Mandate............................................................................................................................................... 3
3. Objectives............................................................................................................................................ 3
4. Scope of Application........................................................................................................................... 3
5. Definitions........................................................................................................................................... 3 Part II-The Net Stable Funding Ratio Framework...................................................................................... 4
6. Net Stable Funding Ratio (NSFR) ...................................................................................................... 4
7. Available Stable Funding.................................................................................................................... 4
8. Required Stable Funding..................................................................................................................... 6

PART I – PRELIMINARY

1. INTRODUCTION 1.1 Banking institutions are required to maintain sustainable funding profile in relation to the composition of the assets and off-balance sheet activities in order to reduce the likelihood that disruptions to regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. 1.2 The Registrar of Financial Institutions (Registrar) has developed these guidelines to complement the Financial Services (Prudential Liquidity Requirements for Banks) Directive, 2018.
2. MANDATE 2.1 These guidelines are issued pursuant to Section 96 of the Financial Services Act 2010.
3. OBJECTIVES The objectives of these guidelines are to ensure that banking institutions: a) Fund long-term activities with sufficient stable sources of funding to mitigate risk of future funding stress; b) Encourage better assessment of funding risk across all on- and off-balance sheet items; and c) Promote funding stability.
4. SCOPE OF APPLICATION 4.1 These guidelines cover the computation of NSFR as a tool for liquidity risk management of banking institutions.
5. DEFINITIONS Available stable funding – refers to the portion of capital and liabilities expected to be reliable over the time horizon which extends to one year. Net Stable Funding Ratio – refers to the amount of available stable funding relative to the amount of required stable funding. Operational deposits - refers to a deposit account maintained by a wholesale or corporate customer for the primary purpose of obtaining a specific operational service

from the banking institution as an independent third-party intermediary, agent or administrator. Retail deposits - refer to deposit liabilities raised by the banking institution from individual clients including sole proprietorships and partnerships, and those classified as micro and small enterprises (hereinafter called retail clients). Required stable funding - refers to the amount of funding needed to support a bank’s assets and off-balance sheet (OBS) exposures based on their liquidity characteristics or liquidity risk profile. PART II-THE NET STABLE FUNDING RATIO FRAMEWORK All banking institutions shall adopt Net Stable Funding Ratio (NSFR) as part of their liquidity risk requirement. 6. NET STABLE FUNDING RATIO (NSFR) Banking institutions shall maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. The ratio should be at least 100.0 percent on an ongoing basis. 7. AVAILABLE STABLE FUNDING 7.1.1 The amount of ASF is determined by assigning the carrying value of the institution’s capital and liabilities to one of the five ASF categories. The amount assigned to each category is then multiplied by an ASF factor and the weighted amounts are then added. 7.1.2 The carrying value of the institution’s capital and liabilities shall refer to the recorded amount before the application of any regulatory deductions and other adjustments. 7.2 Characteristics of Funding Stability 7.2.1 Three (3) characteristics are identified for funding stability, namely: tenure, type and counterparty: a) Funding Tenure: Longer-term liabilities are assumed to be more stable than short term liabilities. As such, funding that matures in more than one (1) year is considered more stable than those maturing in less than a year. b) Funding type: The framework recognizes that certain types of funding are inherently more stable than other types without considering the tenure. Retail deposits are generally considered more stable than wholesale deposits. c) Funding counterparty: The institution’s counterparty influences the stability of funding such that retail customers or counterparties are considered more stable than similar types of funding provided by wholesale customers.

Likewise, funds provided by non-financial corporates/entities are considered more stable than those provided by financial corporate/entities. 7.3 Maturity of Funding 7.3.1 Funding instruments with options to redeem and deposits with withdrawal notice periods shall be assumed to be redeemed through the exercise of an option or withdrawn on the earliest date possible. 7.3.2 For long dated liabilities, only the portion of cash flows due beyond six (6) months and one (1) year time horizon shall receive an ASF based on residual maturity of six (6) months to less than one (1) year and one (1) year or more, respectively. 7.4 ASF Categories 7.4.1 Liabilities and capital with 100% ASF factor, include: a) Total amount of regulatory capital before the application of regulatory adjustments excluding Tier 2 instruments with residual maturities of less than one (1) year, other capital instruments not included above, that have effective residual maturities of one (1) year or more, but excluding any instruments with explicit or embedded options that, if exercised, would reduce the expected maturity to less than one (1) year; b) Wholesale non-operational deposits with residual maturities of one (1) year or more; c) Retail term deposits with residual maturities of one (1) year or more; and d) Secured and unsecured borrowings and other liabilities with residual maturities of one (1) year or more. Cashflows falling below the one-year horizon but arising from liabilities with a final maturity greater than one year do not qualify for the 100 % ASF factor. 7.4.2 Liabilities with ninety-five percent (95%) ASF factor include retail non-maturity deposits and retail term deposits with residual maturities of less than one (1) year and that are covered under deposit insurance scheme. 7.4.3 Liabilities with ninety percent (90%) ASF factor include retail non-maturity deposits and retail term with residual maturities of less than one (1) year and that are not covered under deposit insurance scheme. 7.4.4 Liabilities with fifty percent (50%) ASF factor include: a) Wholesale non-operational deposits with residual maturities of less than one (1) year from sovereigns, public sector entities (PSEs), and multilateral and national development banks; b) Wholesale non-operational deposits with residual maturities of less than one (1) year from non-financial corporates;

c) Wholesale non-operational deposits with residual maturities of six (6) months to less than one (1) year from other banking institutions and financial corporates; d) Secured and unsecured funding with residual maturities of less than one (1) year provided by sovereigns, public sector entities (PSEs), multilateral and national development banks and other financial corporates; e) Secured and unsecured funding with residual maturities of less than one (1) year provided by non-financial corporates; f) Wholesale operational deposits. All current and savings accounts (CASA) that are automatically categorized as operational deposits; g) Other funding with residual maturity between six months and less than one year not included in the above categories, including funding provided by financial institutions; h) Differed tax liabilities with maturity of six months to less than one year; and i) Minority interest with maturity of six months to less than one year. 7.4.5 Liabilities and equities with zero percent (0%) ASF factor include: a) Wholesale non-operational deposits with residual maturities of less than six (6) months from the RBM, other central banks, banks and financial corporates; b) Secured and unsecured funding with residual maturities of less than six (6) months provided by the RBM, other central banks, banks and financial corporates; c) Other sources of funding with residual maturities of less than six (6) months; d) Trade date payables arising from purchase of financial assets pending actual receipt/settlement of the underlying securities; and e) All other liabilities and equity items not included in the above categories. The liabilities shall include those without a stated maturity such as short positions and open maturity positions. Two (2) exceptions shall be recognized for liabilities without a stated maturity: i. Deferred tax liabilities, which shall be treated according to the nearest possible date on which such liabilities could be realized; and ii. Minority interest, which shall be treated according to the term of the instrument, usually in perpetuity. These liabilities shall then be assigned either a 100% ASF factor if the effective maturity is one (1) year or greater or fifty percent (50%) if the effective maturity is between six (6) months and less than one (1) year. 8 REQUIRED STABLE FUNDING 8.1 RSF is calculated by assigning the carrying value of assets and Off Balance Sheet exposures to the relevant RSF category. The carrying value is then multiplied by the corresponding RSF factor to arrive at the weighted amounts. The carrying value of an asset shall be net of loan loss provisions.

8.2 Considerations for Asset Liquidity a) A set of standardized weightings shall be used to determine the amount of stable funding a bank must maintain. RSF factors shall be scaled from zero percent (0%) to 100% based on liquidity characteristics of asset and Off Balance Sheet exposures. b) The RSF factor assigned to each asset represents the amount of a particular asset estimated to be funded, either because the asset will be rolled over or because it could not be monetized through sale or be used as collateral in secured borrowing transaction, over the course of one (1) year. 8.3 The following characteristics are considered collectively for each asset, as applicable: a) Credit Quality: Assets with higher credit quality are perceived to attract more demand from market participants than those with lower credit quality, and thus more liquid than the latter. Under the framework, assets with lower credit quality shall require more stable funding than those with higher credit quality. b) Tenure: Assets with longer maturities are expected to require more funding than those with shorter maturities. This is in view of the longer time necessary for the asset to be converted to cash or for cash inflows to be realized from the asset. Additionally, assets with longer tenure may liquidate at a discount because of the higher market and credit risks associated with the longer time to wait for cash inflows. c) Counterparty: Relationships with counterparties are critical in continuing business. Banking institutions would generally roll over certain exposures to non￾financial counterparties to maintain business relationship and generate additional business in the future. d) Market Characteristics: Assets that have traded in an exchange tend to exhibit a higher degree of liquidity, thus, shall require less stable funding. e) Asset Encumbrance: In general, encumbered assets cannot be monetized during the period they are encumbered. The longer an asset is encumbered, the more stable funding it would require. 8.4 For purposes of determining the RSF, institutions shall include financial instruments, foreign currencies, and commodities for which a purchase order has been executed and shall exclude those for which a sales order has been executed. 8.5 Maturity of assets a) In determining the maturity of an instrument, it shall be assumed that investors will exercise any option to extend maturity. b) Assets with options exercisable at the discretion of the institution, reputational factors which may limit an institution’s ability not to exercise the option shall be considered.

c) For amortizing loans, the portion that comes due within the one-year period shall be classified under the less than one (1) year residual maturity category. 8.6 Asset Encumbrance The RSF factor for an encumbered asset is either the same as, or higher than the RSF factor for an equivalent unencumbered asset. The specific RSF factors for encumbered assets depend on the remaining period of encumbrance: a) On-balance sheet assets that are encumbered for one year or more shall have an RSF factor of 100% while assets encumbered for a period equal to 6 months but less than 1 year shall have a fifty percent (50%) RSF factor. b) Encumbered assets with less than six (6) months remaining in the encumbrance period shall receive the same RSF factor as if the equivalent asset was unencumbered. c) Where beneficial ownership is retained in assets that are encumbered in a repo or other securities financing transactions, and these assets are included in the balance sheet, such assets shall be allocated in their respective RSF category. 8.7 RSF Categories a) Asset assigned a zero percent (0%) RSF factor i. notes and coins; ii. balances with the Reserve Bank of Malawi iii. Treasury Bills maturing in less than 6 months; iv. Reverse repos with RBM maturing in less than 6 months; v. Treasury Bonds maturing in less than 6 months; vi. Treasury Notes maturing within 6 months. b) Assets assigned a five percent (5%) RSF factor i. Marketable securities (maturing in less than 6 months) representing claims on or guaranteed by Multilateral Development Banks (MDBs), central government departments or ministries (e.g. MRA, Immigration, Roads Fund Administration), parastatals or statutory corporations, that are assigned with a 0.0 percent risk weight under the RBM credit risk guidelines, and are not an obligation by an institution or any of an institution’s affiliated entities; ii. Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, and multilateral organizations and banks that are assigned a 0.0 percent risk weight under the Basel III standardized approach for credit risk; iii. certain non-0.0 percent risk-weighted sovereign or central bank debt securities as specified in the LCR; and iv. Treasury Bonds maturing in more than 6 months; v. Treasury Notes maturing in more than 6 months; vi. Treasury Bills maturing in more than 6 months;

c) Assets assigned a ten percent (10%) RSF factor i. Unencumbered loans to banks, financial corporates and other central banks with residual maturities of less than six (6) months and where the loans are secured by Level 1 assets as defined in the LCR rules. d) Assets assigned a fifteen percent (15%) RSF factor i. Unencumbered loans to financial institutions with residual maturities of less than six months not included in (c) above; and ii. Unencumbered Level 2 assets as defined in LCR including:

1. marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that are assigned a 20% risk weight under the Basel III standardized approach for credit risk; and
2. corporate debt securities (including commercial paper) and covered bonds with a credit rating equal or equivalent to at least AA.
3. cheques in the course of collection
4. balances with banks in Malawi
5. Balances with banks abroad: These may be included in liquid assets provided that they are withdrawable on demand or mature within seven (7) days; and denominated in a currency which is freely convertible and transferable in international exchange markets. e) Assets assigned a fifty percent (50%) RSF factor i. Eligible securities representing claims on or guaranteed by sovereigns, other central banks and PSEs of Foreign Countries, and Multilateral Organizations including MDBs. These securities are assigned a fifty percent (50%) risk weight under the standardized approach for credit risk and are not direct obligations of the bank; ii. Corporate debt securities (including commercial papers) assigned with a credit rating of between A+ to A- or equivalent by a third-party credit assessment agency recognized by the RBM, and not issued by the bank or any of its affiliates; iii. Common equity share that are included in the main index of an organized exchange and not issued by the bank or any of its affiliates; iv. Other debt securities with residual maturities of less than one (1) year; v. Loans to banks and financial corporates, with residual maturities of between six (6) months to less than one (1) year; vi. Non-operational deposits held at other banks with residual maturities of between six (6) month to less than one (1) year; vii. Operational deposits held at other banks;

viii. Loans to sovereigns, PSEs of Foreign Countries, and Multilateral Organizations including MDBs with residual maturities of less than one (1) year; ix. Loans to non-financial corporates and micro, small and medium enterprises (MSME) with residual maturities of less than one (1) year; and x. Consumer loans with residual maturities of less than one (1) year. f) Assets assigned a 65.0 percent (65%) RSF factor i. Unencumbered residential mortgages with a residual maturity of one (1) year or more and would qualify for a risk weight of thirty five percent (35%) under the standardized approach for credit risk; and ii. Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more that would qualify for a thirty-five (35%) or lower risk weight under the standardized approach for credit risk g) Assets assigned an eighty five percent (85%) RSF factor i. Unencumbered residential mortgages with a residual maturity of one (1) year or more and would qualify for a risk weight above thirty five percent (35%) under the standardized approach for credit risk; ii. Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more that would not qualify for a risk weight above thirty five percent (35%) under the standardized approach for credit risk; and iii. Other traded equity securities and debt securities with residual maturities of one (1) year or more and not issued by the bank or any of its affiliated entities. h) Assets assigned a 100% RSF factor i. Loans to financial institutions with a residual maturity of one (1) year or more; ii. Non-operational deposits held at other banks with residual maturities of one (1) year or more; iii. Liquidity reserve requirement iv. Non-exchange traded equity shares which are not issued by the bank or any of a its affiliates; v. Defaulted and securities; vi. Fixed assets; vii. Items deducted from regulatory capital; viii. Derivative assets; and ix. All other assets not included in the above categories that are unencumbered for a period of one year or more.

8.8 Off-Balance Sheet Exposures For Off Balance Sheet exposures, the bank shall apply the RSF factor shown below: RSF Factor Off-balance Sheet Items 5% Credit substitutes (Guarantees, letters of credit, assets pledged as collateral/security) Transaction related contingent (Performance Bonds, standby L/Cs etc) Unsecured-undrawn commitments and conditionally cancellable credit and liquidity facilities Other commitments with maturities of over one year 1% Claims to or guaranteed by government Claims with cash collateral Secured-undrawn commitments and conditionally cancellable credit and liquidity facilities Documentary credits (Trade related and self-liquidating) Similar commitments of up to one year or which can be unconditionally cancelled 9. Derivatives a) The amount of the NSFR derivative assets is calculated based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a positive value. On the other hand, where the contract has a negative value, this shall be reflected as NSFR derivative liabilities. For contracts that inherently require net settlement (e.g., non-deliverable forward exchange contract), the expected derivatives exposure shall be reported on a net basis. b) NSFR derivative assets are assigned a 100% RSF factor while NSFR derivative liabilities would not be considered a source of stable funding and would be assigned a zero percent (0%) available stable funding factor. When the NSFR derivative assets are greater than the NSFR derivative liabilities, a 100% RSF factor shall be assigned to five percent (5%) of the NSFR derivative liabilities.

For further enquiries please contact: The Director Bank Supervision Reserve Bank of Malawi P. O. Box 565 Blantyre Tel: +265 (0) 111 820 299/444 Fax: 265 (0) 822 118 Email: basu@rbm.mw